The eurozone and the troika were in uncharted waters last night when the bailout conditions they agreed with Cyprus were resoundingly rejected by the island’s parliament.
The president and head of the government, Nikos Anastasiadis, is under severe pressure from all sides and has called a meeting of the political leaders for this morning.
Members of parliament said they expected he would try to renegotiate the terms of the deal with the troika and in the meantime his finance minister is meeting his Russian counterpart in Moscow this morning.
The island of 1.1m people already has a loan from Russia of €2.5bn that has kept them afloat since Greek bondholders suffered massive cuts, hitting the Cypriots very hard.
Moscow, very sensitive about accusations of Russian hot money in the Cypriot banks, and of being accused of undemocratic practices by the EU, were making the most of Europe’s discomfort yesterday.
There were reports that Moscow would be happy to extend the existing loan and possibly provide additional money in exchange for shares in the recently discovered gas field off Cyprus.
The island had plans to link up with Israel that shares the field and pipe the gas to Greece and across to Bulgaria, giving Europe alternative gas pipelines to those controlled by Russia’s Gazprom.
Before last night’s vote the German finance minister, Wolfgang Schaeuble who had pushed for savings to be levied, described the situation as extremely serious and said he was sorry for the people of Cyprus, according to reports from a meeting of his party, the CDU.
The bailout of €10bn and the conditions attached need to be approved by the German parliament, but last night’s rejection meant it was unlikely to come before the Bundestag before it closes for Easter next Thursday.
The reaction to the unprecedented troika move continued across the globe with the euro trading at its lowest level this year.
On the one hand there were fears that the bailout would falter triggering a default, and on the other hand investors worried about the credibility of the eurozone, its ministers and the troika.
While senior bondholders were not being hit under the bailout conditions, this looked set to backfire as investors feared that all the rules, including hitting senior bondholders, could be broken by eurozone finance ministers.
“The EU and ECB don’t want to lose money and will do what it takes to make somebody else pay, and if it’s convenient to make bondholders pay they’ll do it,” said Peter Tchir, of TF Market Advisors in New York, quoted by Bloomberg.
“They’ve gone too far. This will impact people’s long-term decision making. The only rational decision seems to be to reduce exposure to European banks.”
Britain sent €1m in cash to its military personnel on the island as the ATMs ran out of money and the banks stayed closed until at least tomorrow.
The main objection to the bailout terms are to the proposal to levy a tax of 6.75% on savings of under €100,000 that are guaranteed by the EU’s deposit guarantee, and 9.9% on amounts over that in exchange for shares in the troubled banks.
Attempts to exempt those with less than €20,000 in savings and increase the levy on bigger depositors were not accepted by the parliament.
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